Status: 10/12/2022 12:27 p.m
According to a study, Frankfurt and Munich are among the cities with the highest risk of a real estate bubble in the world. In view of rising interest rates, the major bank UBS is now expecting “significant price corrections”.
Where is the housing market particularly overheated? Which metropolis has the greatest risk of a real estate bubble? The major Swiss bank UBS investigates this question in its annually published “Global Real Estate Bubble Index”. Toronto now ranks first here. The Canadian city has overtaken Frankfurt and swapped places with the financial metropolis. In 2021, Frankfurt was still the city with the highest “risk of bubbles” in the world.
In Germany, according to the experts, not only Frankfurt’s real estate market continues to be severely overheated. The Bavarian metropolis of Munich ranks fourth in the UBS rankings, just behind Zurich.
Still overheated market
“Especially investors who are considering purchases in these regions of Germany for yield reasons should exercise caution at the moment,” advises Maximilian Kunkel, UBS’s chief investment strategist in Germany. For the Swiss bank, Frankfurt and Munich, with bubble index values of 2.21 and 1.80 points respectively, are among the cities with a high bubble risk. According to the Bubble Index, there is a risk of a real estate bubble from a value of 1.5 points.
UBS defines a real estate bubble as a strong and persistent deviation of the price level from certain economic data – such as income, economic growth and population migration.
60 percent more expensive in ten years
Due to low interest rates, home prices have steadily decoupled from local incomes and rents over the past decade, according to UBS. “The cities most at risk of a bubble have seen inflation-adjusted price increases averaging 60 percent over this period, while real incomes and rents have risen by only about 12 percent.”
In previous years, UBS had already noticed that the housing markets in Munich and Frankfurt were overheating. With a view to the proportion of income that employees have to spend on a 60 square meter apartment close to the city centre, Frankfurt and Munich are not in such a bad position. Here they rank far behind Tokyo, Hong Kong, London and Paris.
Is the real estate boom coming to an end?
In Frankfurt, UBS is now observing a cooling of the market. In the Main metropolis, the usual double-digit price increases have fallen for the first time in ten years, it said. “Between mid-2021 and mid-2022, real estate prices rose by only around 5 percentage points.” The apartment prices in Frankfurt are still more than 60 percent above the level five years ago.
Munich has the highest “price-to-rent ratio”. It is therefore particularly expensive to buy a property here in relation to renting. After prices had more than doubled in the past decade, growth here also weakened to around five percent. “The boom is coming to an end,” said Kunkel, looking at both cities.
“Significant price corrections” expected
In general, UBS sees the real estate markets before a turning point. While interest rates have risen rapidly and the economic outlook has clouded over, high inflation is reducing household purchasing power. While many experts only expect the boom to weaken against this background, UBS expects the consequences for real estate prices to be much more severe: In many of the very highly rated cities, “significant price corrections are to be expected” in the next few quarters.